Sales Representation Agreements for Sales Reps
Introduction: Sales Representation Agreements and Legal Protections
Overview of Sales Representation Agreements for Independent Sales Reps
A Sales Representation Agreement (SRA) is the best tool for sales reps to protect their number one asset: long-term commissions.
Unfortunately, the typical SRA has been prepared by the Principal and their corporate counsel, not the sales rep. That can be a problem.
Contract Provisions Needed for Long-Term Protection
The most essential provisions in any SRA are those concerning exclusivity, commissions, territory, and termination.
Exclusivity provisions – are critical. If a Principal provides an SRA that is non-exclusive, that is a red flag. If an appointment is not exclusive, that’s an invitation for company employees to make a claim for the commissions on sales that were actually driven by the sales rep.
Commission provisions – must be drafted to protect long-term commissions, especially when sales will be based on the sales rep’s long-term efforts before landing the sale. There are many tools to accomplish this:
Minimum duration provisions – are contract provisions that make an SRA non-terminable for a negotiated period of time, except for cause.
Life of part or life of customer provisions – are contract provisions that require payment of a commission on sales to particular customers (or of certain parts) for the life of the sales. They can best be used when a Principal is requesting that a sales rep initiate business with a highly sought after account, with whom the sales rep has a long-standing relationship.
“Tail” provisions – are contract provisions that require commission payments on orders received after termination. They can best be used when a long cultivation period is required before the first sale can be made. If the sales rep expects that it will take 18 months to make a sale, they should negotiate a provision requiring payment of commissions for orders received within 18 months after termination (or some shorter agreeable time).
Buyout provisions – are contract provisions that require the Principal to pay a liquidated “buyout” to the sales rep in order to terminate the SRA. The buyout is usually based on the prior year’s (or fiscal quarter’s) sales.
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Common Issues re Sales Representation Agreements
Unpaid or Reduced Commissions
When does a commission become earned?
When a commission becomes earned depends on the SRA’s provisions.
When does a commission become payable?
When a commission becomes payable likewise depends on the SRA’s provisions.
What is the proper commission percentage on a particular sale?
The proper commission percentage on any sale is dictated by the SRA’s provisions. Some SRAs have complicated formulas for calculating commissions, but ultimately the contract language will prevail.
Does the sales rep have to “procure” the sale to earn a commission, or is it good enough that the sale took place in their exclusive territory?
Whether the sales rep is required to be the procuring cause of the sale also depends on the SRA’s provisions. Exclusive appointments normally abate the need to prove procuring cause.
Does the sales rep have to share their commission with another salesperson who may have assisted in the sale?
Generally a sales rep does not have to share their commission with another sales rep that may have assisted with the sale unless the SRA has provisions addressing split commissions.
If the Principal offers a price concession to a customer, does the sales rep have to take a reduction in their commission percentage?
A reduction in a sales rep’s commission percentage does not have to be agreed to, unless it is requested prior to a sale becoming final or if required by the SRA.
Territory Disputes
Is a commission payable if the sales reps solicits and procures a sale outside of their assigned territory?
A commission is still payable even though the sales rep solicited and procured a sale outside of their assigned territory, as long as the Principal has knowledge (and better yet requests) that the sales rep is soliciting the out-of-territory business.
Is a commission payable to the sales rep if another sales reps solicits and procures a sale within their assigned territory?
A commission may still be payable to sales rep 1 even if sales rep 2 solicits and procures a sale within the territory of sales rep 1. It depends on the SRA’s provisions.
What happens if a manufacturer carries several product lines and the sales rep sells a product in their territory that was not one of the products they were authorized to sell?
If the Principal has knowledge (or requests) that the sales rep is soliciting the sale of products not authorized by the SRA, then the sales rep can still make a claim for commissions on such sales.
Dispute over Extent of Exclusivity of Territory
If a direct employee of the company (such as a sales manager) helps make a sale in the sales rep’s exclusive territory, do they get to share the commission?
Generally, when a sales manager or other company employee helps make a sale in the sales rep’s exclusive territory, they do not get to share the commission. However, the SRA should be consulted for provisions that may override that principle.
Does the Principal have a right to have other sales people solicit or assist in soliciting sales in the sales rep’s exclusive territory?
A Principal does have the right to have other sales people solicit or assist in soliciting sales in a sales reps exclusive territory, as long as it does not compromise the sales rep’s commission.
Other Breaches of Contract and Breaches of Covenant
Is a sales rep required to provide sales activity reports?
Sales reps are generally not required to provide sales activity reports unless their SRA requires it. Even then, too much control by a Principal can result in a sales rep being classified as an employee, creating potential problems for the Principal.
Is the sales rep required to divulge confidential information to their Principal regarding their customer base?
A sales rep is not required to divulge confidential information on their customers to their Principals. If such information is sought, that is a red flag,
Do SRAs require the sales rep to drop product lines for other manufacturers in the same industry as their Principal, even if the products are not competitive with their Principal’s?
SRAs generally do not require a sales rep to drop product lines for other manufacturers that are not competitive with those of their Principal. But the Principal may wrongfully demand it anyway.
Terminations
Termination for cause occurs when a sales rep is alleged to have violated an SRA or even principles of ethics and integrity, and they are fired as a result. The critical question is whether or not the Principal has a duty to notify the sales rep of the problem and give them a chance to correct it before terminating. Refer to the SRA provisions.
Termination at will occurs when a sales rep is fired simply because the SRA allows termination on a specific number of days’ notice without conditions.
Bad Faith. The critical inquiry if termination at will occurs is whether the Principal had some ulterior motive, making it a “bad faith termination.” For example (and this happened to one of our clients) the sales rep lands a monumental sale to a VIP type customer that will earn them a $300,000 commission; but the product will not ship for 90 days. So the company gives 30-day notice of termination to preclude payment of the commission. The sales rep would be able to sue for bad faith termination.
Procuring Cause. Another important analysis is whether the contract specifically addresses the sales rep’s right to commissions on post-termination sales, if they are terminated at will. If not, they may still be able to sue for commissions on post-termination sales, needing to prove only that they are the cause of the sale; and should thus be paid a commission even though they are no longer under contract.
Non-Compete Clauses
A noncompete clause is a provision that prohibits a sales rep from working for other manufacturers. Generally, these provisions will be upheld in Court if they prohibit representation of competitors while the SRA is still in effect. But many states have outlawed these provisions once the SRA has ended.
Another issue that can arise in a noncompete dispute is whether another manufacturer’s products are truly competitive with that of the sales rep’s Principal. Simply because a manufacturer is in the same industry does not mean that they manufacturer competitive products.
Before these issues go too far, a sales rep should contact an attorney with knowledge of this area of law to set the record straight and create a path forward without a lawsuit.
Key Elements in a Sales Representation Agreement
- Identification of the Parties (Including contact info for notice purposes.)
- Exclusive or Nonexclusive Representation (Is it a free for all in the Territory.)
- Commission Structure, Payment Terms (Rates, timelines, triggers, charge-backs.)
- Territory Assignments and Boundaries (Geographic or account-based territories.)
- Products (Define specific products or lines that are commissionable.)
- Duration and Termination (Length of contract, and grounds for termination.)
- Non-Compete and Confidentiality Agreements (Restrictions after contract ends.)
- Performance Metrics and Quotas (Quotas are disfavored but sometimes required.)
- Dispute Resolution Provisions (Mediation, arbitration, or court jurisdiction.)
- Venue (Where will a dispute be heard.)
- Renewal & Amendment Terms (Conditions for extending or modifying agreements.)
- Termination Provisions (“At will” or “for cause.” Right to post-termination commissions)
Steps to Take with Sales Representation Agreements
Step 1: Negotiate and Sign a Fair SRA from the Start
- Request a territory development fee if there are little or no sales in the assigned territory. It could be set up as a draw against future commissions.
- Demand a reasonable duration for the contract. If it takes a long time to cultivate sales, seek a one-year or two-year minimum duration.
- Demand fair termination provisions. If it typically takes years to generate sales of “designed in” engineered products, for instance, seek a long “tail period” for post-termination commissions. Or a long notice period before termination takes effect.
Example – one of our clients in the defense industry took 2 years of intense efforts to procure sales to one of the world’s largest defense contractors. She then landed sales valued at $80 million over 7 years, earned just one six-figure commission check for one month of shipments, and was then shockingly terminated for no reason.
The contract had no “tail” provisions for the right to commissions on post- termination sales. We therefore had to sue for bad faith termination, a much more sophisticated claim than breach of contract. Knowing there would be a long cultivation period, this rep should have protected her work by requiring commissions on sales for a negotiated time after termination.
Step 2: If an SRA is in Effect and Under Threat
- Look for termination clauses and commission payment terms.
- Highlight these provisions for discussion with an attorney who understands SRAs, and laws that protect sales reps.
- Note that even if an SRA allows only 30 day notice to terminate, with no strings attached on commission payments, a sales rep may still have the right to commissions on post-termination sales for which they were responsible.
Step 3: Gather Documentation
- Emails are important to set the context of the dispute.
- PO’s, shipment records, invoices, and payment records establish a case.
- Spreadsheets should then be prepared to document damages.
Step 4: Meet with an Attorney
- Review your SRA with them.
- Get their opinions on viable causes of action (claims).
- Plan a strategy to avoid a lawsuit.
Step 5: Send a Demand Letter Including
- Identification of the Parties (Clarify sender and recipient.)
- Statement of Facts (Summarize the facts behind the fee dispute or violation.)
- Statement of Law (Give legal citations supporting the claims.)
- Specifying the Demands (Outline what must be paid, or what actions taken.)
- A Deadline for Resolution (Provide a specific deadline for a response.)
- Notice of Legal Action (Warn of a lawsuit if demands aren’t met.)
Step 6: File a Lawsuit (if negotiations fail)
How a Contract Attorney Can Help with Sales Representation Agreements
- Negotiating Essential Provisions (Each case has unique needs in this regard.)
- Drafting New Agreements (Ensure compliance with laws and fairness for all parties.)
- Reviewing Existing Contracts (Identify gaps, risks, and unfair provisions.)
- Negotiating Modifications/Amendments (Renegotiate terms to resolve disputes.)
- Drafting Modifications/Amendments (To garner more fair provisions.)
- Sending Demand Letters (To recover commissions, enforce territories, protect rights.)
- Attending Mediations (A settlement conference with a Judge to try to avoid lawsuits.)
- Filing Lawsuits/Arbitrations (For breach of contract/covenant or statutory violations.)
FAQs About Sales Representation Agreements
An SRA means a Sales Representation Agreement, which is a written contract between a manufacturer (the Principal) and a sales rep (the agent) authorizing the sales rep to sell the Principal’s products and be paid a commission.
See Key Elements in a Sales Representation Agreement – above.
A sales reps can recover commissions plus potentially more when their SRA is breached; but there is a high level of nuance in bringing a lawsuit in this niche area of law. Lawyers experienced in the law pertaining to sales reps should be consulted.
We have over 70 years of combined experience in this area.
Generally, non-compete clauses are enforceable. However certain States prohibit them after an SRA has ended.
Start by seeking to negotiate something with your Principal. If that’s not possible, retain a lawyer to write a demand letter. If a demand letter does not result in settlement, retain counsel to file a lawsuit. 35 states have laws protecting sales reps and their commissions. Some award triple or even quadruple damages. Most award attorney fees.
Protect Your Rights with Strong Sales Representation Agreements
- A well-drafted SRA will protect commission revenue, prevent commission disputes and help avoid lawsuits.
- Try to avoid signing an SRA presented by a Principal because they are usually very one-sided. Instead, contact an attorney proficient in this area of law to help negotiate something better.
- Whether you need a new SRA negotiated and drafted, modifications/amendments to an existing SRA or help enforcing one, contact our attorneys today for a free consultation.